Japan FSA finds smaller banks lag in money laundering fight -sources

TOKYO, Oct 2 (Reuters) - Japan’s smaller banks are behind in taking steps against money-laundering and terrorism financing, Japan’s financial regulator has found, according to people familiar with the matter and documents seen by Reuters.

A survey by the Financial Services Agency uncovered deficiencies among Japan’s regional banks and credit associations, and the regulator has begun onsite probes of lenders to prod them into compliance, the sources said.

The Paris-based Financial Action Task Force (FATF), a 37-nation group set up by the Group of Seven industrial powers to fight illicit finance, is to evaluate Japan’s performance in 2019.

But an FSA survey, seen by Reuters, found that many of Japan’s smaller lenders have inadequate risk management and little buy-in from senior management.

The regulator launched the survey early this year, concerned about patchy measures for fighting criminal abuse of the financial system and worried that without an appropriate response international trust in the system could be shaken.

In the worst case, Japanese banks with inadequate controls could face such penalties as losing their correspondent bank relations with overseas banks in areas such as foreign exchange, the sources said.

As a result of the survey, the FSA has begun onsite inspections and plans stricter monitoring as well as compliance seminars to improve banks’ measures to curb illicit finance, the sources said.

An FSA spokesman declined to comment on the survey or any follow-up measures.

The Regional Banks Association of Japan declined to comment on the FSA survey as it has not been announced, but an association official said, “Measures against money laundering are an important undertaking from the perspective of crime prevention, so we would like to proactively support our members in improving their practices.”

The National Association of Shinkin Banks also would not comment on the probe, but an official said, “We would like to respond appropriately, while watching the movements of the authorities.”

The FSA survey found that 20 percent of regional banks hadn’t completed risk evaluations of their transaction counterparties to check for potential money laundering or terror finance, as required by Japan’s Act on Prevention of Transfer of Criminal Proceeds.

Among local credit unions, 50 percent haven’t compiled the assessments, while the number reaches 60 percent for community-focused “shinkin” lenders.

Elsewhere in the Asia-Pacific region, a slew of scandals has dented the reputation of Australian banks as simple, reliable lenders at the forefront in the battle against financial crime, while Indonesia last month issued expanded regulations against money laundering and terror finance. (Reporting by Sumio Ito; Assitional reporting by Takahiko Wada; Writing by Junko Fujita; Editing by William Mallard & Simon Cameron-Moore)